Bridging Loans: All You Need to Know in February 2024
In simple terms, a bridging loan is one that businesses can apply for to receive prompt funding that they will usually pay off in the short-term future. This loan is used to finance your company until your next source of income becomes available, such as a property sale, significant investment, or any other large asset gain. It is a ‘bridge’ to connect you to your subsequent funding when you have a period that your income does not quite reach.
What is a Bridging Loan?
A bridging loan is a sum of money given to you by a lender to cover general business expenses when you are awaiting a significant transaction and need money to maintain your company. This can fund a variety of elements such as office space rent, gas and electricity bills, paying your workforce or purchasing raw materials and equipment. They are considered short-term loans. They are relatively easy to qualify for and receive and are often paid back within one year from their start.
Unfortunately, it isn’t easy to gauge their exact interest rate because this depends on the sum borrowed, the company’s history, and the variable. Still, they are sometimes more expensive than other loans because of their accessibility. Usually, business bridging loans start from 0.65% interest, but they are often higher.
Some benefits of business loans include:
- Working capital support
- Easy to apply for
- No profit sharing
- No collateral required
- Reasonable interest rates
- Tax benefits
- Working capital support
- Multiple loan options
How Do Bridging Loans Work?
Bridging loans are pretty straightforward when their elements are broken down. Firstly, it is essential to research a range of lenders to find the best interest rates and variables for your business and consider the time you have to pay the loan off. Once you have established how much you need to borrow and which lender you will use, you can begin the process. Important things to note include whether the loan is open, with no set-in-stone final payment date, or closed, with a specific date to repay the loan with interest.
Additionally, most bridging loans are fixed-rate, indicating that the interest rate remains the same throughout the contract, giving you predictability and setting aside the same amount each month. On the other hand, variable rate loans can fluctuate in interest, making repayments more unpredictable yet cheaper. You must also have assets to use as collateral.
Bridging Loan Example
A business may require a bridging loan to cover a period of financial instability until they gain a secure income. For example, a company may be waiting for a large business deal, securing them a large sum. Still, until the details have been perfected in the upcoming months, they need cash to cover their business expenses such as rent, lighting and electricity. As a result, a bridge loan of £50,000 can help finance the company until this income is made.
Considering the fixed-rate interest rate of 1%, the amount to pay would be £50,500. If this were to be paid back within one year, the monthly payment would be £4,208.33 per month. Extra expenses that should be noted include valuation fees, legal fees and VAT.
Advantages and Disadvantages
The main advantage to bridging loans is that they are generally simple to apply for and receive, as long as you are a suitable applicant, because of their fast nature. They are designed as a short-term loan and a quick solution to a temporary problem, allowing a business to operate until they resolve its cash flow setback. Furthermore, bridge loans are flexible because there are many options to choose from, such as fixed or variable rate interest and open or closed loans. Businesses can therefore receive monetary aid without a complex and lengthy loan process, as well as choosing the terms that are most tailored to them.
Although bridging loans are ideal for businesses experiencing short-term financial difficulties, there are some disadvantages associated with the nature of these loans. For instance, because most bridge loans are paid back within a year, their interest rate is usually higher, and admin fees are more expensive, as this process must be done promptly. Also, most lenders require collateral, such as business property, which risks the assets being seized. It is worth noting that bridge loans should only be taken out if a secure stream of income comes into the business before its repayment date.
|Business Loans in the UK
Direct funder – not a broker
|£8,000 – £500,000
Fast, hassle-free business finance from £10,000 to £500,000 at competitive, fixed rates
They will run pre-eligibility checks, without affecting your credit score
|4.9/5 Trustpilot rating
|Must be a limited company with 6+ months of trading
|Must have a min of 1 year trading
|Europes largest revenue finance provider
|Must take on a min of £3,000 per month of card transactions
|£3,000 sales per month
|No penalties for early or late repayments
|Only available to Limited companies in England/wales
|Lender & Broker
|Must be a limited company with 2+ years of trading
Bridging Loans – To Conclude
In conclusion, commercial bridging loans are short-term advances offered by lenders when a business needs financial assistance to continue operating because they are waiting on a large sum shortly.
Funding options discuss obtaining business loans with bad credit in more detail here.
Other useful links about loans:
Understanding Small Business Loans
What is a Personal Guarantee?
Manufacturing Business Loans
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